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on Dynamic General Equilibrium |
| By: | Postel-Vinay, Fabien; Turon, Hélène |
| Abstract: | Individual labour earnings observed in worker panel data have complex, highly persistent dynamics. We investigate the capacity of a structural job search model with i.i.d. productivity shocks to replicate salient properties of these dynamics, such as the covariance structure of earnings, the evolution of individual earnings mean and variance with the duration of uninterrupted employment, or the distribution of year-to-year earnings changes. Specifically, we show within an otherwise standard job search model how the combined assumptions of on-the-job search and wage renegotiation by mutual consent act as a quantitatively plausible 'internal propagation mechanism' of i.i.d. productivity shocks into persistent wage shocks. The model suggests that wage dynamics should be thought of as the outcome of a specific acceptance/rejection scheme of i.i.d. productivity shocks. This offers an alternative to the conventional linear ARMA-type approach to modelling earnings dynamics. Structural estimation of our model on a 12-year panel of highly educated British workers shows that our simple framework produces a dynamic earnings structure which is remarkably consistent with the data. |
| Keywords: | covariance structure of earnings; individual shocks; job search; structural estimation |
| JEL: | J31 J41 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5593&r=dge |
| By: | Gautier, Pieter A; Teulings, Coen N; van Vuuren, Aico |
| Abstract: | We characterize the equilibrium of a search model with a continuum of job and worker types, wage bargaining, free entry of vacancies and on-the-job search. The decentralized economy with monopsonistic wage setting yields too many vacancies and hence too low unemployment compared to first best. This is due to a business- stealing externality. Raising workers’ bargaining power resolves this inefficiency. Unemployment benefits are a second best alternative to this policy. We establish simple relations between the losses in production due to search frictions and wage differentials on the one hand and unemployment on the other hand. Both can be used for empirical testing. |
| Keywords: | on-the-job search; sorting |
| JEL: | J64 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5575&r=dge |
| By: | Fernández-Villaverde, Jesús; Rubio-Ramirez, Juan F |
| Abstract: | This paper shows how particle filtering allows us to undertake likelihood-based inference in dynamic macroeconomic models. The models can be nonlinear and/or non-normal. We describe how to use the output from the particle filter to estimate the structural parameters of the model, those characterizing preferences and technology, and to compare different economies. Both tasks can be implemented from either a classical or a Bayesian perspective. We illustrate the technique by estimating a business cycle model with investment-specific technological change, preference shocks, and stochastic volatility. |
| Keywords: | business cycle; dynamic macroeconomic models; nonlinear and/or non-normal models; particle filtering; stochastic volatility |
| JEL: | C11 C5 E10 E32 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5513&r=dge |
| By: | Dominik Grafenhofer; Christian Jaag; Christian Keuschnigg; Mirela Keuschnigg |
| Abstract: | The paper develops an overlapping generations model with probabilistic aging of households. We define age as a set of personal attributes such as earnings potential, health and tastes that are characteristic of a person's position in the life-cycle. In assuming a limited number of different states of age, we separate the concepts of age and time since birth. Agents may retain their age characteristics for several periods before they move with a given probability to another state of age. Different generations that share the same age characteristics are aggregated analytically to a low number of age groups. The probabilistic aging model thus allows for a very parsimonious yet rather close approximation of demographic structure and life-cycle differences in earnings, wealth and consumption. Existing classes of overlapping generations models follow as special cases. |
| Keywords: | overlapping generations, aging, demographics, life-cycle earnings |
| JEL: | D58 D91 H55 J21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1680&r=dge |
| By: | Pijoan-Mas, Josep |
| Abstract: | Habit formation has been proposed as a possible solution to the equity premium puzzle. This paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings, wealth, habits and consumption. I find that habit formation does indeed increase the equity premium. However, contrary to earlier results, the habit hypothesis does not imply a price for risk as big as the one measured in the data. There are three reasons for this. First, households in a habits economy modify their consumption/savings decision. Second, they modify their portfolio choice. These two changes in behavior diminish the consumption fluctuations faced by households. And third, the composition of the set of agents pricing risk in the economy changes so that relatively better self-insured households end up pricing risk. |
| Keywords: | equity premium; habit formation; incomplete markets |
| JEL: | C68 D52 E21 G12 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5602&r=dge |
| By: | Miquel Faig |
| Abstract: | This paper provides a tractable search model with divisible money that encompasses the two frameworks currently used in the literature. Individuals belong to many villages. Inside a village, individuals know each other so financial contracts are feasible. Money is essential to facilitate trade across villages. When financial markets inside a village are complete, the model generalizes the framework advanced by Lagos and Wright (2005) without having to assume quasi-linear preferences. Likewise, complete financial markets in each village substitutes for the representative household in the framework advanced by Shi (1997). The paper describes sets of financial arrangements that complete the markets inside the villages. In general, these financial arrangements include a combination of credit and insurance. However, if individuals choose period by period the trading role they play outside their village, then under some parametric restrictions either a lottery or a risk-free bond market are sufficient. |
| Keywords: | monetary search, divisible money |
| JEL: | E40 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-216&r=dge |
| By: | Christiane Clemens (Economics Department, University of Hannover); Maik Heinemann (Institute of Economics, University of Lüneburg) |
| Abstract: | This paper discusses the emergence of endogenous redistributive cycles in a stochastic growth model with incomplete asset markets and heterogeneous agents, where agents vote on the degree of progressivity in the tax-transfer-scheme. The model draws from Bénabou (1996) and ties the bias in the distribution of political power to the degree of inequality in the society, thereby triggering redistributive cycles which then give rise to a nonlinear, cyclical pattern of savings rates, growth and inequality over time. |
| Keywords: | Inequality, growth, political cycles, redistribution, Hopf bifurcation |
| JEL: | D31 E62 O41 P16 |
| Date: | 2005–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:lue:wpaper:5&r=dge |
| By: | Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier |
| Abstract: | Three of the most important recent facts in global macroeconomics - the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio - appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) hetero- geneity in these regions’ capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. |
| Keywords: | capital flows; current account deficits; exchange rates; FDI; global portfolios and equilibrium; growth and financial development asymmetries; interest rates; intermediation rents |
| JEL: | E0 F3 F4 G1 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5573&r=dge |
| By: | Giannitsarou, Chryssi |
| Abstract: | It is known that, in the context of a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule, steady state indeterminacy may arise as a result of endogenous labor income tax rates. In this paper, it is shown that when the government finances its expenditures via an endogenous consumption tax instead, there exists a unique steady state which is always saddle-path stable. As a result, combining income taxes with consumption taxes makes the ranges of indeterminacy shrink, thus reducing the possibility of aggregate instability. From a policy perspective, the results provide an additional argument in favor of (less distortionary) consumption taxes in place of capital taxes. |
| Keywords: | balanced budget rules; consumption tax; fiscal policy; indeterminacy |
| JEL: | C62 E62 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5531&r=dge |
| By: | Doepke, Matthias; Schneider, Martin |
| Abstract: | This paper shows that a zero-sum redistribution of wealth within a country can have persistent aggregate effects. Motivated by the case of an unanticipated inflation episode, we consider redistribution shocks that shift resources from old to young households. Aggregate effects arise because there are asymmetries in the reaction of winners and losers to changes in wealth. We focus on two sources of asymmetries: differences in the average age of winners and losers, and differences in their labour force status. |
| Keywords: | aggregate effects; inflation; redistribution |
| JEL: | D31 D58 E31 E50 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5552&r=dge |
| By: | Michael Halisassos (School of Economics and Business, Goethe University Frankfurt); Michael Reiter (Dept. of Economics and Business, Universitat Pompeu Fabra) |
| Abstract: | Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an ‘accountant-shopper’ framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers. |
| Keywords: | Credit Cards, Debt, Self Control, Household Portfolios |
| JEL: | E21 G11 |
| Date: | 2005–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200526&r=dge |
| By: | Benigno, Gianluca; Thoenissen, Christoph |
| Abstract: | This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector. |
| Keywords: | consumption-real exchange rate anomaly; incomplete financial markets; non-traded goods |
| JEL: | F31 F41 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5580&r=dge |
| By: | Lloyd-Braga, Teresa; Nourry, Carine; Venditti, Alain |
| Abstract: | In this paper we consider a Ramsey one-sector model with non-separable homothetic preferences, endogenous labour and productive external effects arising from average capital and labour. We show that indeterminacy cannot arise when there are only capital externalities but that it does when there are only labour external effects. We prove that sunspot fluctuations are fully consistent with small market imperfections and realistic calibrations for the elasticity of capital-labour substitution (including the Cobb-Douglas specification) provided the elasticity of intertemporal substitution in consumption and the elasticity of the labour supply are large enough. |
| Keywords: | capital and labour externalities; endogenous cycles; endogenous labour supply; indeterminacy; infinite-horizon model |
| JEL: | C62 E32 O41 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5541&r=dge |
| By: | Miquel Faig; Belén Jerez |
| Abstract: | We study the effects of inflation in a competitive search model where each buyer's utility is private information, and where money is essential in facilitating trade. The equilibrium is efficient at the Friedman rule, but inflation creates an inefficiency in the terms of trade. Buyers experience a preference shock after they are matched with a seller, and thus they have a precautionary motive for holding money. Sellers, who compete to attract buyers, post non-linear price schedules to screen out different types of buyers. As inflation rises, sellers post relatively flat price schedules which reduce the need for buyers to hold precautionary balances. These price schedules induce buyers with a low desire to consume to purchase inefficiently high quantities because of the low marginal cost of purchasing goods. In contrast, buyers with a high desire to consume purchase inefficiently low quantities as they face binding liquidity constraints. The reduction of precautionary balances as inflation rises allows the model to fit historical US data on velocity and interest rates. |
| Keywords: | inflation; precautionary money demand; competitive search; private information. |
| JEL: | E40 E52 D58 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-215&r=dge |
| By: | Kollmann, Robert |
| Abstract: | This paper analyses the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behaviour of those series confirms the theoretical predictions. |
| Keywords: | consumption and portfolio home bias; current account; international portfolio holdings |
| JEL: | F2 F3 G1 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5512&r=dge |
| By: | Marchetti, Domenico J.; Nucci, Francesco |
| Abstract: | Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favour of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper we estimate a variety of alternative TFP measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours. Using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with more flexible prices. Price stickiness remains a crucial factor in the response of hours even if product storability or market power are allowed for. Our results hold under alternative assumptions for the stationarity of hours per capita. |
| Keywords: | labour input; price rigidity; productivity shocks |
| JEL: | E31 E32 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5504&r=dge |
| By: | Miquel Faig; Xiuhua Huangfu |
| Abstract: | This is a comment on the work of Rocheteau and Wright (2005) who have recently introduced competitive search into monetary economics. We extend their work by eliminating the restriction that the fees market makers charge to enter a submarket must be either non-negative or identical for buyers and sellers. Without this restriction, buyers pay a positive fee to enter the submarket they visit and nothing else when they meet a seller. Sellers are remunerated by the market makers from the entry fees collected from the buyers. This trading arrangement allows buyers to perfectly predict their expenses, so the opportunity cost of holding idle money balances is eliminated. |
| JEL: | E40 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-217&r=dge |